Low oil prices putting US drillers out of business

Scott Tong Dec 8, 2015
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Low oil prices putting US drillers out of business

Scott Tong Dec 8, 2015
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For the first time in almost seven years, the international price of oil, what the pros call the “Brent price,” fell below $40 a barrel. In this prolonged, low-price environment, U.S. industry and investors have been waiting to see which oil companies would liquidate first.

In financial markets, analysts often refer to a “Wile E. Coyote” moment. It refers to the old cartoon where a doomed predators runs off a cliff and suspends in mid-air before plunging. Similarly, in the oil patch, the smallest independent drillers can defy gravity no longer. Some three dozen have declared bankruptcy.

“They carry weaker balance sheets,” said Barbara Shook of Energy Intelligence Group. “And they have less borrowing power. We’ve starting seeing the smaller companies shutting the doors.”

Shook likened this bust to 1986, when the Texas jobless rate rose to 9 percent.

“I think in the end it’s going to be just as brutal as we saw then,” she said.

Not everyone agrees. Ed Morse, head of commodities research at Citigroup, has long been bullish on U.S. producers. And he’s long been right. But even Morse sees some pain ahead for independents.

“The indebtedness of these companies is going to really hit,” Morse said. “They will run out of cash, many of them, they will not be able to drill.”

Next year, domestic production will fall by 570,000 barrels a day, according to a new projection from the federal Energy Information Agency.

The situation now is to watch for which small drillers go under next. Bill Arnold, energy management professor at Rice University, said it reminds him of the old comic strip Alphonse and Gaston: in it, a pair of bumbling Frenchmen compete to out-polite each other, saying: “You go first.” “No, please, after you.”

“This has been something that’s been going on for some months now,” Arnold said. “It’s kind of the ‘After you, Alphonse’ kind of syndrome. ‘I’d be happy to continue to produce, but even happier if you didn’t.'”

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